KATHMANDU UNIVERSITY

DHULIKHEL, KAVRE

Course: CIEG 405

Midterm Assessment/Individual Assignment

SUBMITTED TO:
Mr. Bibhu Ratna
Tuladhar Department of
BBIS

SUBMITTED BY:
Aayush Gurung
Roll No: 17
Group: CIEG (4th Year/1st Semester)

Date of Submission: 23rd July, 2021

 1. In addition to the normal obstacles of starting a business, what
advantages and barriers do recent college graduates face in
pursuing their entrepreneurial journey?
ANS:

An entrepreneur is one who creates a new business in the face of risk and
uncertainty for the purpose of achieving profit and growth by identifying
significant opportunities and assembling the necessary resources to capitalize on
them. Anyone, regardless of age, race, gender, color, national origin, or any other
characteristic, can become an entrepreneur (although not everyone should).
There are no limitations on this form of economic expression. Entrepreneurship
is not a mystery; it is a practical discipline. Entrepreneurship is not a genetic
trait; it is a skill that most people can learn. However, going through the
entrepreneurial path isn’t always on the sunny side. Being an entrepreneur means
both the advantages and obstacles in the way. And for the students trying to be in
the entrepreneurial journey must face both sides of the coin.

Surveys show that student entrepreneurs believe they work harder, can earn more
money, and are more satisfied than if they worked for someone else. Before
launching any business venture, every potential college graduate entrepreneur
should consider the benefits of the business ownership:

 Opportunity to do what they enjoy and have fun at it:

A common sentiment among fresh college graduates is that their work really
isn’t work. Most successful entrepreneurs choose to enter their particular
business fields because they have an interest in them and enjoy those lines of
work. So, entrepreneurship can be the perfect opportunity for these fresh
college graduates to drag their passion into their work. In this way, they won’t
get bored of their work plus they can put their heart into their start-ups which
can result into a fruitful and profitable entrepreneurial journey in their life.
 Opportunity to reach full potential:

Too many people find their work boring, unchallenging, and unexciting. But
not entrepreneurs! To them, there is little difference between work and play;
the two are synonymous. Entrepreneurs’ businesses become their
instruments
for self-expression and self-actualization. They know that the only boundaries
on their success are those imposed by their own creativity, enthusiasm, and
vision. Owning a business gives them a sense of empowerment. A fresh
college graduate can bring a new perspective to the business. They might be
able to point out flaws or solutions to existing problems in a creative and
ingenious way which might be a great advantage while starting a new business.
The new innovative idea could be the key to their successful entrepreneurial
journey.

 Opportunity to make a difference:

Increasingly, entrepreneurs are starting businesses because they see an

opportunity to make a difference in a cause that is important to them. They use
their skills not only to create profitable business ventures but also to achieve
social and environmental goals for society as a whole A basic computer
knowledge is essential in any field and most of the students are taught about
different computer skills in the college which could be later used in any new
business and it could be modernized using those skills which could make the
business more systematic and smoother to learn. The generation gap becomes
evident when it comes to the technologies. The recent college graduate most
likely have the idea and knowledge about the recent introduced technologies
and are quite updated. The knowledge about the latest technology could be a
great advantage in starting an entrepreneurial journey since by utilizing the
technology to the fullest different task could be completed pretty easily and
efficiently and the business could grow quite faster. Hence, it is also a great
advantage for a recent college graduate for pursuing their entrepreneurial
journey.

 Opportunity to create own destiny:

Owning a business provides these fresh graduate entrepreneurs the

independence and the opportunity to achieve what is important to them. These
fresh college graduates want to “call the shots” in their lives, and they use their
businesses to make that desire a reality. For many entrepreneurs, living where
and how they choose is one of the principal benefits of controlling their
destinies through business ownership.

 Opportunity to reap impressive profits:

Although money is not the primary force driving most entrepreneurs, the
profits their businesses can earn are an important motivating factor in their
decisions to launch companies. These fresh college graduate entrepreneurs are
not constrained by the boundaries that corporate hierarchies impose on their
employees; they are free to create value by making the best use of their
experience, skills, abilities, and ideas and, as a result, reap the financial
benefits of their creative efforts. As a result, these college graduates can be
able to reap the seeds of their efforts and ideas and can generate profits.

Owning a business has many benefits and provides many opportunities;

however, anyone planning to enter the world of entrepreneurship should be
aware of its potential drawbacks. So, for these fresh college graduates to be
in their entrepreneurial journey, they must consider the potential setbacks of
this start-up journey. Major barriers for these fresh college graduates in this
entrepreneurial journey can be summed up as:

 Lack of the fund:

To start any new business a huge amount of money is essential. Being a recent
college graduate there is high probability that the entrepreneur won’t have
enough money and funding would be essential. Getting a funding to start any
business is a great barrier for the entrepreneur as the idea is not sufficient to
start any business but the idea must be converted to reality which is not
possible without sufficient funding. Hence, it’s a great barrier for recent college
graduate in pursuing for their entrepreneurial journey.

 Discouragement:

Launching a business is a substantial undertaking that requires a great deal of

dedication, discipline, and tenacity. Along the way to building a successful
business, entrepreneurs will run headlong into many different obstacles, some
of which appear to be insurmountable. In the face of such difficulties,
discouragement and disillusionment are common emotions.

 Lack of right team:

Since it is not so easy to start any new business without partners, they are
essential. But being a recent college graduate who is pursuing to become an
entrepreneur selection of right partner is quite difficult and if the partners
selected are not as expected it could be great barrier for the recent college
graduate to succeed. Picking the right team for a start-up is stressful and
difficult especially for younger entrepreneurs like recent college graduates. In
order to search the candidates who fill certain roles, it is necessary to consider
their cost to business, their culture fit and how they will work as part of the
team. These considerations are extremely hard especially for those recent
college graduates when they are under the pressure of filling those positions as
soon as possible.

 Lack of experience:

The experts always mention that one should never rush in setting up a business.
It is quite necessary to gain a relative amount of work experience by working in
the industry domain or sector of choice and as per the education levels. But
being a recent college graduate the person probably lack all these things which
could be a great barrier for any new recently graduated entrepreneur to succeed
in entrepreneurial journey.

 Lack of decision making:

When it comes to decision making, younger entrepreneurs are certainly not the
best at it based on their limited or no experience at all. The less experience due
to younger age makes them feel under more pressure which can lead to
mistakes in decision making.
 Lack of knowledge in the Entrepreneurial field:

Having a theoretical knowledge is not sufficient for any entrepreneur. We are

mostly taught about different theoretical approaches in college but the real
world is quite different. Having a strong educational background is not
sufficient to pursue any business as it required practical knowledge for
entrepreneur to stay relevant in the various market cycles. So not having a
greater practical knowledge about the business could hinder the entrepreneurial
journey of recent college graduate.

Despite the challenges that starting and running a business pose, entrepreneurs
are very satisfied with their career choices.
 2. Consider a local business you are familiar with and explain its
competitive advantage in its markets? How does the company sustain
its competitive advantage?
ANS:

One of the local métier I am amicable with is “Sumo Sushi and Coffee House”. It
is a local café plus restaurant with its forte in Japanese cuisine and coffee. For any
business to succeed, the business must have their value proposition that sets the
business apart from its competitors and gives it a unique proposition in the market
that is superior to the competition. It is the differentiating factor that makes
customers want to buy from your business rather than from your competitors. From
a strategic perspective, the key to business success is to develop a sustainable
competitive advantage, one that is durable, creates value for customers, and is
difficult for competitors to duplicate.

The restaurant industry is highly competitive unless we have a good chef or novel
cuisine. Gaining a competitive edge is highly indispensable in any business start-
ups. For that, “Sumo Sushi and Coffee House” has its own competitive
advantages over its competitors in the area. The competitive advantages it holds
over its competitors are explained as below:

 Product Differentiation:

“Sumo Sushi and Coffee House” is the only restaurant in the area with pure
local Japanese cuisine like Nama Harumaki, Vegan Maki Sushi, Yakisoba,
Chicken Nanban and so on which are purely Japanese cuisine. Plus it offers
various coffee and drinks. Also, it offers the regular dishes as Mo:Mo which are
the core food of its competitors. Its variety in dishes and cuisines, coffee and
drinks plus its speciality in Japanese dishes gives it a edge over its competitors.

 Quality Differentiation:

The Quality of the dishes is high as the head chef of the café is an ex-owner
plus chef of restaurant in Japan. The chef is a novel chef who had been
cooking in Japan for over 20 years. The quality of the food is what hooks
people to the
café and makes them choose the café over their regular café they go. Also, the
coffee is properly brewed by the owner himself who is a Barista expert.

 Price Differentiation:

The price is always a major factor for the customers to decide their dining
place. Keeping that in mind, “Sumo Sushi and Coffee House” is constantly
keeping certain discount on the items. Plus the coffee and the local dishes are at
attractive price which taps into much larger market.

 Experience Differentiation:

Some retail locations acknowledge that the experience of the visit is compelling
differentiation for customers regardless of the products sold. The café offers a
specific Japanese theme and musical environment which makes the café stand
out from its competitors.

 Value Differentiation:

Besides earning profits, the café is based on making profits for the customers
and the environment by minimizing the use of plastic and plastic straws. Also,
the café is operated in an ethical and socially responsible fashion.

Building a competitive advantage alone is not enough; the key to success over
time is building a sustainable competitive advantage. In the long run, a
company gains a sustainable competitive advantage through its ability to
develop a set of core competencies that enable it to serve its selected target
customers better than its rivals. In order to attain sustainable competitive
advantage, “Sumo Sushi and Coffee House” stick to the following principles:

 Culture:

The culture of a restaurant is similar to the personality of an individual, like no

two people are alike and it is impossible to duplicate. The culture of a
restaurant is a sustainable competitive advantage because it is the foundation on
which all other sustainable competitive advantages come from. The purpose of
the restaurant existence will naturally attract both customers and equally as
important, committed employees who share the values and sense of purpose.
The environment of “Sumo Sushi and Coffee House” reflects comfy Japanese
feeling with a sense of musical theme. The café focuses on its quality and
profits for both customers and the café itself.

 People:

Undoubtedly, the quality and caliber of the people employed will determine the
sustainability of the competitive advantage. Sustainable competitive advantages
don’t create themselves, people do. Keeping this in mind, the commitment of
the employees and the team is considerate for the purpose of the café. The best
operators also understand that sustainable competitive advantage comes from
regular training and development of the team. Continuing education, the
sharing of knowledge and experience, and development of skills, not only
contribute to the culture of excellence, but also instill a sense of pride and
loyalty throughout the ranks of the team. Keeping current with changing food
trends, understanding its business and customers’ economic environment,
knowing the competition and taking advantage of the resources available
through its strategic vendor partners is creating a powerful sustainable
competitive advantage for your restaurant.

 Processes:

The internal operations of the cafe are another source of sustainable competitive
advantage. These are processes; the sum of all systems, procedures, policies
and technologies that propel the cafe forward. The systematic process of the
work done in “Sumo Sushi and Coffee House” creates order and
predictability in the work done and with order, comes efficiency. The
sustainable competitive advantage that the café gained from having solid
processes is: consistency, efficiency and predictability. It ultimately impacts the
quality and predictable outcome of the guest’s experiences.
 3. Identify the opportunities and threats facing Tootle. How could
Tootle use its existing marketing strategy to ensure that it retains its
competitive advantage in the face of these opportunities and threats?

ANS:

Tootle is a ride-sharing app within Kathmandu valley that connects people who
are looking for a ride with people who are willing to share their journey in two-
wheelers. It connects two strangers one being the ride provider and the other being
the ride user through technology in the name of an app 'TOOTLE'. It addresses
the common problems of congested public vehicle, expensive taxi fares and
crowded traffic inside the Kathmandu valley. However, in the recent times its
market has been little down due to its competitor in the industry ‘PATHAO’.

Opportunities ‘TOOTLE’ have in this ride-sharing market can be described in the

points below:

 Tootle is a concept based on ride sharing which was initiated during the time
of fuel crisis in Nepal. If the same amount of fuel can be shared and used for
the benefit of two persons instead of one then obviously it will help reduce
the extra fuel consumption. Reducing fuel consumption is a massive step
towards clean and green environment. In fact Tootle is an indirect, small but
significant means of conserving Earth's natural resources.
 There are many such people who need to travel short distances within the
valley regularly that simply cannot compromise on punctuality, be it a
student or an employee. For them public vehicle is highly unreliable mode
of transportation. In addition there are certain places where public vehicles
are not accessible but people need to go to such places. Tootle just proves to
be the exact solution for these cases.
 Inside the valley the public vehicles are overcrowded, uncomfortable and as
if these were not enough to cause trouble to passengers the public vehicles
fail to maintain cleanliness. Overall the public vehicles are poorly
maintained. Tootle can come as a boon for the passengers facing such
difficulties by providing safe, efficient and enjoyable ride.
 For the females who do not feel comfortable to share their ride with a total
stranger, Tootle is the ultimate choice for travel as it provides gender
preference to make sure the ride is comfortable for people.
 It is such a considerate tool for the drivers that they have the choice whether
or not to accept the ride offer.With the click of a button in the app, they can
go online and be ready for taking trips and when they are busy, with a click,
they can go offline. So, for the people looking for a part time job or even a
full time job, Tootle is a great opportunity.
 Similar problems concerning the service of public vehicles outside the
Kathmandu valley can be seen and observed on a day to day basis and with
the increasing use of smart phones and internet all over Nepal, Tootle has a
huge opportunity to expand its beneficial services outside the Kathmandu
valley too.

To the other side of the coin, ‘TOOTLE’ has to face the equal threats due to
the increasing competitors in the market. Followings are the threats ‘TOOTLE’
has been facing in the current scenario:

 Safety of ride in a two wheeler has always been major concern in the
transportation system of Nepal. Tootle is not exempted from the fact that its
mode of transport is in a two-wheeler which is more prone to road accidents.
The accident rate of two-wheelers inside the Kathmandu valley is relatively
higher than other vehicles. The existing vulnerable road conditions, ill
condition of vehicles and unreliable drivers are the threats for Tootle.
 The behavioral aspect of riders is always a concern as it cannot be
controlled. For example: When you order a ride but you are not on time or
when someone offers a ride but he/she is not on time. Also if one of the
riders or client misbehaves towards the other then it will be an extremely
difficult challenge to overcome for Tootle. Failure to have control over such
behavioral aspects is certainly a threat for Tootle.
 As it is a ride sharing app, the personal details like phone numbers are
shared in the app and there is a risk of such personal details being misused.
Misuse of the personal details of Tootle riders or clients is also a threat for
Tootle.
  Use of technology brings few loopholes too. Loopholes can be identified and
exploited by the riders, for example: Riders can ask their clients to cancel up
the trip in the app so that they can escape the payment to be made to Tootle.
These kinds of loopholes are also the threat for Tootle.
 The maps in the app are not detailed enough though they have landmarks.
Also the steps for booking the ride are quite tedious. If the interface is not
friendly for the users then it can be a threat for Tootle.

Tootle is an easy interface due to which customers love it. They enjoy benefits of
the service. So, in order for it to retain its competitive advantage in the face of
opportunities and threats, it must ensure various marketing strategies. The culture
of sharing ride is totally new to Nepalese society. Most of the people are skeptical
to share ride with strangers and that’s normal while many people are unknown
about Tootle. To change the old mindset of people is the greater challenge. Tootle
needs substantial promotion and marketing to reach every doorstep of the Nepalese
family. The number of two-wheeler users inside Kathmandu valley is huge and
Tootle can encourage those two-wheeler owners to utilize their spare seat capacity
through offers and promotions. Tootle can attract its customers by collaborating
with the other companies like Ncell, Nepal telecom, banking industry and can
offer tootle ride offer promotions and discounts to customers of those companies.
Offers, discounts and giveaways can be launched through social media campaigns.
Discounts can be given to new clients who use their unique promo codes. Tootle
can place their advertisements on the billboards and hoarding boards at places like
traffic junctions, bus stations etc. to attract the customers. Tootle can collaborate
with hotels, lodges and resorts by providing discounts to their customers for using
Tootle and Tootle can give certain commission in return to the hotels for each
customer they provide. Through the promotional video involving female Tootle
riders and clients Tootle can even promote the woman empowerment. This
certainly provides an edge to ‘Tootle’ over other ride sharing business models.
The beautiful social interactions between the rider and the client occurring in real
time can be captured and used as the promotional video for ‘Tootle’. Tootle can
even create awareness about saving fuel for environmental conservation in its
promotional videos. This way Tootle can be even more attracting than other ride
sharing business models.
Tootle must offer a large service range that addresses the needs of several customer
segments. Apart from individual riders and users, Tootle must bring attractive
services for businesses. Its services must not be limited to bike rides but extend to
other areas too including food delivery, health and logistics. Unlike Pathao which
provides wide range of services, Tootle must cater to a variety of customer
segments including individual riders, groups and families as well as businesses.
Tootle’s affordable pricing model has proved to be a key driver of demand and
growth in the valley. So, Tootle must further provide a large range of affordably
priced services for public which would drive its popularity high and also made
transportation affordable for thousand around the nation. Lastly, Tootle’s business
model must be attractive, strong as well as profitable. It should adopt a business
model that allows it to cut down operational costs while also keep prices low and
deliver the best performance.
 4. Describe why is it important for entrepreneurs to research their
industry and markets before launching a business. Why do so many
fail to do so?
ANS:

For any business to be booming, proper target market of the business must be kept
into consideration. Finding the company’s niche in the market can be considered
profitable, also the company’s identity in the marketplace must be identified. To be
customer driven, an effective marketing strategy must be based on a clear,
comprehensive understanding of a company’s target customers and their needs. By
performing some basic market research, aspiring entrepreneurs and owners of
existing small business can detect key demographic and market trends. Marketing
consultants argue that information is just as much a business asset as equipment,
machinery, and inventory.

Market research is the vehicle for gathering the information that serves as the
foundation for the marketing plan. It involves systematically collecting, analyzing,
and interpreting data pertaining to a company’s market, customers, and
competitors. The objective of market research is to learn how to improve the level
of satisfaction for existing customers and to find ways to attract new customers.
Small companies cannot afford to make marketing mistakes because there is little
margin for error when funds are scarce and budgets are tight. Small businesses
simply cannot afford to miss their target markets, and market research can help
them zero in on the bull’s-eye. Market research does not have to be time
consuming, complex, or expensive to be useful. By applying the same type of
creativity to market research that they display when creating their businesses,
entrepreneurs can perform effective market research “on the cheap. Many
entrepreneurs are discovering the power, the speed, the convenience, and the low
cost of conducting market research over the Internet. Online surveys, customer
opinion polls, and other research projects are easy to conduct, cost virtually
nothing, and help companies to connect with their customers. With online
surveys, businesses can get real-time feedback from customers, often using
surveys they have designed themselves. Web sites such as Survey Monkey and
Zoomerang allow entrepreneurs to conduct low-cost (sometimes free) online
surveys of existing or prospective customers. Many companies are using social
media sites such as Facebook and Twitter as market research tools. Entrepreneurs
can use
surveys and social media to gain insight into the market that used to require hiring
a marketing research consultant.

The goal of market research is to reduce the risks associated with making business
decisions. For the entrepreneur, there is no bigger decision than the one to start or
not start a new business. Market research can replace misinformation and
assumptions with facts. Researching the market industry and marketplace before
launching any business succors can be summed up with following points:

 Developing new product ideas and designs.

 Determining if there is demand for the business-products so we
know whether or not to provide service with.
 Identifying market segments for the products.
 Making pricing decisions.
 Evaluating packaging types.
 Evaluating in-store promotions.
 Measuring the satisfaction of the potential customers.
 Measuring the satisfaction of the possible channel partners.
 Evaluating the effectiveness of the business Web site.
 Testing the effectiveness of ads and their placement in the industry.
 Making marketing channel decisions to the ease.

However, marketing research isn’t as easy as it seems to. Many unsuccessful

market research are still being conducted. It can be considered as the major factor
for the mortality of the major of start-ups as they fail to compete with the big-dogs
of the industry. Successful market research consists of four steps: define the
problem, collect the data, analyze and interpret the data, and draw conclusions,
including how we may need to pivot our business model. Unsuccessful market
research generally do not consists of the methods afore-mentioned. Ignoring these
methods can lead to unsuccessful market research.

Market research project fails when they aren’t designed with a specific goal in the
mind. A clear objective guides a good and successful research design. Quality data
relies upon its source. So, it’s a must for researches to identify and call upon the
people most eligible to light up the answers and ideas they need. One failing to do
so, results in the failure of market research eventually. Novice or untrained
individuals can often generate inaccurate or biased interview data. Most
commonly, interviewers unintentionally bias participant responses by “leading”
people to conclusions they wouldn’t have otherwise made. So, the information
collected during market research can be misleading due to the poor interviewer
and thus resulting into failure. One of the main reasons why market research fails
is because it was done too late. Many companies try to use old research to solve
current problems, which eventually results into the incompatibility with current
market industry and current market research needed isn’t met. Companies might
get surprising results from the research conducted but yet, choose to overlook what
the data shows them or twist it in order to justify what they already believe, which
most often results in the unsuccessful market research. Faulty data management
tactics can sometimes inadvertently ruin entire projects. There are a number of
methods for meticulously inputting, cleaning, interpreting, and sharing data. To
have a successful market research experience, businesses must strive for unbiased
research techniques and embrace any unexpected results. One of the main reasons
market research fails, is due to the selection of the easiest methods convenient for
the researchers which isn’t necessarily the best and the most suitable methods
for the market research. The major reasons for the failure of the market and
industry research can be summed up into following points:

 Use of the wrong methods.

 No clear objective of the research.
 Targeting the wrong respondents.
 Waste of time.
 Results are met with the closed mind.
 Poor Interviewer skills.
 Faulty data management.
 Ignoring the results.
6. What marketing potential does the World Wide Web offer small
businesses? What does it take for a company to market successfully using
the Web?
ANS:

World Wide Web, often referred as WWW, is the leading information retrieval
service of the internet. World Wide Web gives the users access to a large array of
documents that are connected to each other by hypertext or hypermedia. In the
forever augmenting growth of the use of the internet, World Wide Web offers a
wide potential for marketing of the businesses. Despite the enormous growth of
the World Wide Web, most of the entrepreneurs are still lacking the proper
erudition of World Wide Web. Due to the inexperienced management, limited
management and lack of proper marketing, small businesses suffer high mortality
rates.

World Wide Web marketing involves the use of digital media to inform the market
of our business and to beguile people to purchase our products and services.
World Wide Web marketing must be part of our integrated marketing approach.
The Web’s potential for business-to-business marketers is vast as long as it is
properly used. Nearly one in five small businesses does not have a Web site, and
many of those that do have sites that lack the ability to make sales online. To
online shoppers, especially, these businesses might as well be invisible because
doing business online and offline are inextricably connected. Today’s shoppers
prefer to purchase from companies that offer a multichannel approach, particularly
those that offer in-store pick-up for online orders and in-store returns for online
purchases. Marketing potentials World Wide Web offers to small businesses
includes:

 World Wide Web marketing enables us to be open for business around the
clock without worrying about opening the business for hours or paying for
over time employees. Customers can browse our web and place an order
whenever it’s convenient for them.
 World Wide Web also allows small businesses to overcome distance
barriers. Small Businesses can sell the products in any part of the country
without setting up local outlets, widening the target market. It can also
help small businesses to help building an export business without opening
a network of distributors.
  World Wide Web provides business-to-business marketers with numerous
tools that aid in planning, organization and control; research and
intelligence and marketing mix management.
 Also, World Wide Web helps the small businesses to obtain marketing
data. With online search engines, they retrieve primary and secondary data
on a host of subjects including consumers, industries, products and
technology.
 By visiting other sites, small businesses can keep tabs on their competitors,
thereby gaining extensive product and service information, as well as
public news on competitor’s future and current strategies.
 World Wide Web can be quite helpful for customer support for small
businesses. Sites often have a technical area so users get answers to
questions; access documents; download software, drivers and patches;
e- mail to the party; and communicate with the online discussion groups.
 The use of the World Wide Web often enables small businesses to
lower inventory investments and generate faster turnover.
 Many small businesses can use World Wide Web to enhance
branding, image, and loyalty.

People now spend more time online and the fact continues to strengthen with the
increasing use of technology. However, converting these digital users into online
customers requires a business to do more than merely set up a Web site and wait
for the hits to start rolling up. Building sufficient volume for a site takes energy,
time, money, creativity, and, perhaps most important, a well-defined strategy. The
basic drivers of a successful business are the same on the Internet and Web as on
Main Street. The goals of Web Marketing are no different from traditional offline
businesses—to increase sales, improve efficiency, and boost profits by serving
customers better. Following strategies shall be adopted by a company wanting to
market successfully using the web:

 Focusing on a niche in the market:

Rather than trying to compete head-to-head with the dominant players on the
Web who have the resources and the brand recognition to squash smaller
competitors, many entrepreneurs find success serving market niches. The idea
is to concentrate on serving a small corner of the market that the giants have
overlooked. Niches exist in every industry and can be highly profitable given
the right strategy for serving them. Because of its pervasive reach and ability to
tap large numbers of customers with a common interest, the Web provides an
ideal mechanism for implementing a focus strategy.

 Developing a community:

On the Web, competitors are just a mouse click away. To attract customers and
keep them coming back, companies have discovered the need to offer more than
just quality products and excellent customer service. Many seek to develop a
community of customers with similar interests, the nucleus of which is their
Web site. Adding social login options to a Web site allows customers to make
purchases from their social media accounts without having to create user
profiles. Small businesses that are most successful at building a community
enlist their most passionate customers as company evangelists through social
media outlets such as Facebook, LinkedIn, Twitter, Pinterest, Instagram, and
YouTube. Companies that successfully create a community around their Web
sites turn their customers into loyal fans who keep coming back and, better yet,
invite others to join them. Engaging customers through social media helps
companies build a loyal following of fans who are passionate about its products
or services and share news about the company with their friends.

 Listening to the customers and acting what we hear:

On social media, customers often talk about the brands they buy and businesses
with which they interact. Successful companies make a concerted effort to
listen to what their customers are saying about them on social media and
respond to the feedback. Because of social media, customer comments, both
positive and negative, play a more important role in a company’s reputation
than ever before. Some negative comments are inevitable, and the worst thing a
company can do is ignore them because customers do not. Entrepreneurs
should be taking the time to tune in to social media to hear what customers are
saying about their businesses so that they can resolve their customers’ problems
and improve their companies’ reputations.
 Attracting Visitors by Giving Away “Freebies”:

One of the most important words on the Internet is “free.” Many successful
web-merchants have discovered the ability to attract visitors to their sites by
giving away something free and then selling them something else. It can also be
considered as “the rhythm of web”. The “freebie” must be something customers
value, but it does not have to be expensive, nor does it have to be a product. In
fact, one of the most common giveaways on the Web is information. Creating a
free online or e-mail newsletter with links to your company’s site is one of the
most effective ways of driving potential customers to a site. Meaningful content
presented in a clear, professional fashion is a must.

 Selling the experience:

When shoppers enter a retail store, they are courted by an attractive layout,
appealing décor, and eye-catching merchandise displays and perhaps are
greeted by a salesperson who can offer them information and advice about its
products and services. Although e-commerce businesses lack this ability to
have face-to-face contact with customers, they can still engender loyalty by
creating an engaging and enjoyable online shopping experience. Sites that offer
shoppers easy navigation, a simple and fast checkout process, and thorough
product descriptions with quality images can provide the same positive
shopping experience that the best retail stores do.

 Making creative use of e-mail but avoiding being a scammer:

E-mail is still the backbone of online marketing, especially for small businesses.
Numerous studies show that e-mail is the most common marketing tool among
small businesses. Used properly and creatively, e-mail can be an effective, low-
cost way to build traffic on a Web site. Customers welcome well-constructed
permission e-mail that directs them to a company’s site for information or
special deals. Unfortunately, spam, those unsolicited and universally despised
e-mail messages (which rank below postal “junk mail” and telemarketing calls
as the worst form of junk advertising), limits the effectiveness of companies’ e-
mail legitimate marketing efforts.
To avoid having their marketing messages become part of that electronic
clutter, companies rely on permission e-mails, collecting customers’ and
visitors’ e-mail addresses (and their permission to send them e-mail messages),
when they register on a site to receive a freebie. The most successful marketers
give new customers a reason to open welcome e-mails, such as including an
offer to “enjoy 10 percent off your first order.” To be successful at collecting a
sufficient number of e-mail addresses, a company must make clear to
customers that they will receive messages that are meaningful to them and that
the company will not sell e-mail addresses to others.

 Making sure the website says “Credibility”:

Online shoppers are wary, and with the prevalence of online fraud, they have
every right to be. Unless a company can build visitors’ trust in its Web site,
selling to them is virtually impossible. Visitors begin to evaluate the credibility
of a site as soon as they arrive. Although quality content is crucial for
converting visitors into paying customers, visitors’ initial impressions of a site
are almost wholly design related, which means that entrepreneurs must create
sites that are simple, consistent, appealing, and easy to navigate. One of the
simplest ways to establish credibility with customers is to use brand names they
know and trust. Whether a company sells nationally recognized brands or its
own well-known private brand, using those names on its site creates a sense of
legitimacy. People buy brand names they trust, and online companies can use
that to their advantage.

Another effective technique is to include an “about us” page on the Web site so
that customers can read about the company’s “story”—its the business, the
challenges they have overcome, and other details. Customers enjoy supporting
small businesses with which they feel a connection, and this is a perfect
opportunity for a small company to establish that connection. Many small
companies include photographs of their brick-and-mortar stores and of their
employees to combat the Web’s anonymity and to give shoppers the feeling that
they are supporting a friendly small business.
 Making the most of Web’s global reach:

Despite the Web’s reputation as an international marketplace, many

entrepreneurs fail to utilize fully its global reach. Limiting a global market to
only a small portion of its potential by ignoring foreign customers makes little
sense. E-companies wanting to draw significant sales from foreign markets
must design their sites with their foreign customers in mind. Global shoppers
are much more likely to purchase from sites that are written in their own
languages. When translating the content of their Web sites into other
languages, entrepreneurs must use extreme caution. This is not the time to pull
out their notes from an introductory Spanish course and begin their own
translations.
Hiring professional translation and localization services to convert a company’s
Web content into other languages minimizes the likelihood of a company
unintentionally offending foreign customers.

 Go Mobile:

The typical online shopper has expanded his or her reach across multiple
screens (and screen sizes). Companies that fail to develop Web sites that
display effectively on mobile devices suffer from lower search engine results
listings and miss out on potential sales. Web sites do note render properly on
mobile devices. That creates a considerable problem because 61 percent of
mobile users say that they quickly move on to other sites when they cannot
navigate a site and find the items they want to purchase. By investing a little
more time and money to create responsive Web sites, those that conform
naturally and seamlessly to the size and resolution of the screen on which they
are displayed, small companies can accommodate customers on any device
from which they want to shop.
Read the following case carefully and answer the questions that follow: [10]

Joe and Kaitlin Eden, co-owners of Eden’s Garden, a small nursery lawn, and
garden supply business, has just received their year-end financial statements
from their accountant. At their last meeting with their accountant, Shelley
Edison, three months ago, the Eden’s have mentioned that their seemed to be
having trouble paying their bills on time. “Some of our suppliers have
threatened to put us on ‘credit-hold,’” said Joe. “I think you need to sit down
with me very soon and let me show you how to analyze your financial
statements so you can see what’s happening in your business,” Edison told
them at that meeting. Unfortunately, that was the beginning of Eden’s
Garden’s busy season, and the Eden’s were busy running the company that
they never got around to setting a time to meet with Shelley. “Now that
business has slowed down a little, perhaps we should call Shelley and see what
she can do to help us understand what our financial statements are trying to
tell us,” said Kaitlin.“Right. Before it’s too late to do anything about it,” said
Joe, pulling out the following financial statements.

(a) Assume the role of Shelley Edison. Using the financial statements for
Eden’s Garden, calculate four important financial ratios that include
liquidity ratio, leverage ratio, operating ratio, and profitability ratio
respectively.

ANS:

Creating projected financial statements helps entrepreneurs to transform their

business goals into reality. Proper financial controls succor to keep the companies
moving in the right direction. As the accountant of Eden’s Garden, the financial
statement of Eden’s Garden can be used to calculate four important financial ratios.

I. Liquidity Ratio:

Liquidity ratios tell whether a small business will be able to meet its shortterm
financial obligations as they come due. These ratios forewarn a business owner of
impending cash flow problems.
 A) Current Ratio:

The current ratio measures a small firm’s solvency by indicating its ability to
pay current liabilities (debts) from current assets. Eden’s Garden has total
current assets of $129,936 and total current liabilities of $87,622. The current
ratio of Eden’s Garden is calculated as:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡i𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿i𝑎𝑏i𝑙i𝑡i𝑒𝑠
$129,936
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡i𝑜 =
$87,622
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡i𝑜 = 1.48 : 1

B) Quick Ratio:

The quick ratio (sometimes called the acid test ratio) is a more conservative
measure of a company’s liquidity because it shows the extent to which its most
liquid assets cover its current liabilities. Eden’s Garden has total current assets
of $129,936 and inventory of $88,157 and total current liabilities of $87,622.
The quick ratio of Eden’s Garden is calculated as:
𝑄𝑢i𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠
𝑄𝑢i𝑐𝑘 𝑅𝑎𝑡i𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙i𝑎𝑏i𝑙i𝑡i𝑒𝑠
$129,936 − $88,157
𝑄𝑢i𝑐𝑘 𝑅𝑎𝑡i𝑜 =
$87,622
𝑄𝑢i𝑐𝑘 𝑅𝑎𝑡i𝑜 = 0.48 : 1

II. LEVERAGE RATIO:

Leverage ratios measure the financing supplied by a firm’s owners against that
supplied by its creditors; they are a gauge of the depth of a company’s debt. These
ratios show the extent to which an entrepreneur relies on debt capital (rather than
equity capital) to finance the business.
A) Debt Ratio:

A small company’s debt ratio measures the percentage of total assets financed
by its creditors compared to its owners. Eden’s Garden has total current
liabilities of $87,622, total long-term liabilities of $119,446 and total assets of
$280,843. The debt ratio of Eden’s Garden is calculated as:
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 (𝑙i𝑎𝑏i𝑙i𝑡i𝑒𝑠)
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡i𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
$87,622 + $119,846
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡i𝑜 =
$280,843
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡i𝑜 = 0.74 : 1

B) Debt-to-net-worth Ratio:

A small company’s debt-to-net-worth (debt-to-equity) ratio also expresses the

relationship between the capital contributions from creditors and those from
owners and measures how highly leveraged a company is. Eden’s Garden has a
total debt of $207,068, Owner Equity’s capital of $73,375 and 0$ intangibles.
The debt-to-net-worth is calculated as:
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑛𝑒𝑡 𝑤𝑜𝑟𝑡ℎ 𝑅𝑎𝑡i𝑜 =
𝑇𝑎𝑛𝑔i𝑏𝑙𝑒 𝑛𝑒𝑡 𝑤𝑜𝑟𝑡ℎ
$207,068
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑛𝑒𝑡 𝑤𝑜𝑟𝑡ℎ 𝑅𝑎𝑡i𝑜 =
$73,375 + $0
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑛𝑒𝑡 𝑤𝑜𝑟𝑡ℎ 𝑅𝑎𝑡i𝑜 = 2.82 : 1

C) Time Interest Earned Ratio:

The times-interest-earned ratio is a measure of a small company’s ability to

make the interest payments on its debt. Eden’s Garden has net income of
$30,189 and total interest expense of $21,978. The Time Interest Earned
Ratio is then calculated as:
𝐸𝑎𝑟𝑛i𝑛𝑔 𝑏𝑒ƒ𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑟 𝑇𝑎𝑥𝑒𝑠
𝑇i𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 𝑅𝑎𝑡i𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
$30,189 + $21,978
𝑇i𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 𝑅𝑎𝑡i𝑜 =
$21,978
𝑇i𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 𝑅𝑎𝑡i𝑜 = 2.37 : 1
III. OPERATING RATIO:

Operating ratios help an entrepreneur evaluate a small company’s overall

performance and indicate how effectively the business employs its resources.
The more effectively its resources are used, the less capital a small business will
require.

A) Average-Inventory-Turnover Ratio:

A small firm’s average-inventory-turnover ratio measures the number of

times its average inventory is sold out, or turned over, during the accounting
period. Eden’s Garden has cost of goods sold as $395,683, beginning
inventory of
$78,271 and ending inventory of $86,157. The average inventory turnover
ratio of Eden’s Garden is calculated as:
𝐶𝑜𝑠𝑡 𝑜ƒ 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 = $395,683

($78,271 + $86,157) ÷ 2

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 = 4.81 𝑡i𝑚𝑒𝑠/𝑦𝑒𝑎𝑟

B) Average-Collection-Period Ratio:

A small firm’s average-collection-period ratio (or days sales outstanding

[DSO]) tells the average number of days it takes to collect accounts receivable.
Eden’s Garden has credit sales of $289,484 and accounts receivable of
$29,152.
𝐶𝑟𝑒𝑑i𝑡 𝑆𝑎𝑙𝑒𝑠
𝑅𝑒𝑐𝑒i𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒i𝑣𝑎𝑏𝑙𝑒
$289,484
𝑅𝑒𝑐𝑒i𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 =
$29,152
𝑅𝑒𝑐𝑒i𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 = 9.93 𝑡i𝑚𝑒𝑠/𝑦𝑒𝑎𝑟
The firm’s average collection period ratio is calculated as:
𝐷𝑎𝑦𝑠 i𝑛 𝑎𝑐𝑐𝑜𝑢𝑛𝑡i𝑛𝑔 𝑝𝑒𝑟i𝑜𝑑
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡i𝑜𝑛 𝑃𝑒𝑟i𝑜𝑑 𝑅𝑎𝑡i𝑜 =
𝑅𝑒𝑐𝑒i𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜
365𝑑𝑎𝑦𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡i𝑜𝑛 𝑃𝑒𝑟i𝑜𝑑 𝑅𝑎𝑡i𝑜 =
9.93𝑡i𝑚𝑒𝑠/𝑦𝑒𝑎𝑟

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡i𝑜𝑛 𝑃𝑒𝑟i𝑜𝑑 𝑅𝑎𝑡i𝑜 = 37 𝑑𝑎𝑦𝑠

C) Average Payable Period Ratio:

The converse of the average-collection-period ratio, the average-payable-period

ratio (or day payables outstanding, DPO) tells the average number of days it
takes a company to pay its accounts payable. Eden’s Garden has purchases of
$403,569 and accounts payable of $54,258.

𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒

$403,569
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 =
$54,258

𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 = 7.43 𝑡i𝑚𝑒𝑠/𝑦𝑒𝑎𝑟

Average Payable Period Ratio of Eden’s Garden is calculated as:

𝐷𝑎𝑦𝑠 i𝑛 𝑎𝑐𝑐𝑜𝑢𝑛𝑡i𝑛𝑔 𝑝𝑒𝑟i𝑜𝑑

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑃𝑒𝑟i𝑜𝑑 𝑅𝑎𝑡i𝑜 =
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜

365 𝑑𝑎𝑦𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑃𝑒𝑟i𝑜𝑑 𝑅𝑎𝑡i𝑜 =
7.43 𝑡i𝑚𝑒𝑠/𝑦𝑒𝑎𝑟

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑃𝑒𝑟i𝑜𝑑 𝑅𝑎𝑡i𝑜 = 49 𝑑𝑎𝑦𝑠

D) Net-Sales-To-Total-Assets Ratio:

A small company’s net-sales-to-total-assets (also called the total-asset-turnover)

ratio is a general measure of its ability to generate sales in relation to its assets.
 Eden’s Garden has net sales of $689,247 and net total assets of $280,843.

The total assets turnover ratio of Eden’s Garden is calculated as:

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 = 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

𝑁𝑒𝑡 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
$689,247
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 =
$280,843

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡i𝑜 = 2.5 : 1

IV. PROFITABILITY RATIOS:

Profitability ratios indicate how efficiently a small company is being managed.

They provide the owner with information about a company’s ability to use its
resources to generate a profit, its “bottom line.”

A) Net-Profit-on-Sales Ratio:

The net-profit-on-sales ratio (also called the profit-marginon-sales ratio or the

net-profit-margin ratio) measures a company’s profit per dollar of sales.
Eden’s Garden has net profit of $30,189 and net sales of $689,247.

The Net-Profit-on-Sales Ratio of Eden’s Garden is calculated as:

𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡
𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡 𝑜𝑛 𝑆𝑎𝑙𝑒𝑠 𝑅𝑎𝑡i𝑜 =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
$30,189
𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡 𝑜𝑛 𝑆𝑎𝑙𝑒𝑠 𝑅𝑎𝑡i𝑜 =
$689,247

𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡 𝑜𝑛 𝑆𝑎𝑙𝑒𝑠 𝑅𝑎𝑡i𝑜 = 4.38%

B) Net-Profit-to-Assets Ratio:

The net-profit-to-assets (return-on-assets) ratio tells how much profit a

company generates for each dollar of assets it owns. Eden’s Garden has net
profit of $30,189 and total assets of $280,843.
The Net-Profit-to-Assets Ratio of Eden’s Garden is calculated as:

𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡
𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡 𝑡𝑜 𝐴𝑠𝑠𝑒𝑡𝑠 𝑅𝑎𝑡i𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
$30,189
𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡 𝑡𝑜 𝐴𝑠𝑠𝑒𝑡𝑠 𝑅𝑎𝑡i𝑜 =
$280,843

𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡 𝑡𝑜 𝐴𝑠𝑠𝑒𝑡𝑠 𝑅𝑎𝑡i𝑜 = 10.74%

C) Net-Profit-to-Equity Ratio:

The net-profit-to-equity ratio (or return on net worth ratio) measures the
owners’ rate of return on investment (ROI). Eden’s Garden has net profit of
$30,189 and owner’s equity of $73,375.

The Net-Profit-to-Equity Ratio is calculated as:

𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡
𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡 𝑡𝑜 𝐸𝑞𝑢i𝑡𝑦 𝑅𝑎𝑡i𝑜 = ′
𝑂𝑤𝑛𝑒𝑟 𝑠 𝐸𝑞𝑢i𝑡𝑦
$30,189
𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡 𝑡𝑜 𝐸𝑞𝑢i𝑡𝑦 𝑅𝑎𝑡i𝑜 =
$73,375

𝑁𝑒𝑡 𝑃𝑟𝑜ƒi𝑡 𝑡𝑜 𝐸𝑞𝑢i𝑡𝑦 𝑅𝑎𝑡i𝑜 = 41.14%

(b) Interpret the calculated financial ratios and draw conclusion about
company’s financial performance.

ANS:

Ratios are useful yardsticks when measuring a small firm’s performance and
can point out potential problems before they develop into serious crises.
However, calculating these ratios is not enough to ensure proper financial
control.

1) Current Ratio:

Eden’s Garden has $1.48 in current assets for every $1 it has in current
liabilities.

Current assets are those that an owner expects to convert into cash in the
ordinary business cycle and normally include cash, notes/accounts receivable,
inventory, and any other short-term marketable securities. Current liabilities are
those short-term obligations that come due within one year and include
notes/accounts payable, taxes payable, and accruals. The current ratio is
sometimes called the working capital ratio and is the most commonly used
measure of short-term solvency.

Typically, financial analysts suggest that a small business maintain a current

ratio of at least 2:1 (i.e., $2 of current assets for every $1 of current liabilities)
to maintain a comfortable cushion of working capital. Generally, the higher a
company’s current ratio, the stronger its’ financial position; however, a high
current ratio does not guarantee that a company is using its assets in the most
profitable manner. For example, a business may have an abundance of
accounts receivable (many of which may not even be collectible) or may be
overinvesting in inventory.

With its current ratio of 1.48, Eden’s Garden could liquidate its current assets at
67.5 percent (1 ÷ 1.48 = 67.5%) of its book value and still manage to pay its
current creditors in full.
2) Quick Ratio:

Eden’s Garden has 48 cents in quick assets for every $1 of current liabilities.

The quick ratio is a more rigorous test of a company’s liquidity. It measures a

company’s capacity to pay its current debts if all sales income ceased
immediately. Generally, a quick ratio of 1:1 is considered satisfactory. A ratio
of less than 1:1, as is the case with Eden’s Garden, indicates that the small firm
is dependent on inventory and on future sales to satisfy short-term debt. A
quick ratio of greater than 1:1 indicates a greater degree of financial security.

3) Debt Ratio:

Creditors have claims of 74 cents against every $1 of assets that Eden’s Garden
owns, meaning that creditors have contributed 1.3times as much to the
company’s asset base as its owners have.

Total debt includes all current liabilities and any outstanding long-term notes
and bonds. Total assets represent the sum of the firm’s current assets, fixed
assets, and intangible assets. A high debt ratio means that creditors provide a
large percentage of a company’s total financing and, therefore, bear most of its
financial risk. Owners generally prefer higher leverage ratios; otherwise,
business funds must come either from the owners’ personal assets or from
taking on new owner, which means giving up more control over the business.
In addition, with a greater portion of a firm’s assets financed by creditors, the
owner is able to generate profits with a smaller personal investment. Creditors,
however, typically prefer moderate debt ratios because a lower debt ratio
indicates a smaller chance of creditor losses in case of liquidation. To lenders
and creditors, high debt ratios mean a higher risk of default.
4) Debt-to-Net-Worth Ratio:

Eden’s Garden owes creditors $2.82 for every $1 of equity Sam owns.

Total debt is the sum of current liabilities and long-term liabilities, and tangible
net worth represents the owners’ investment in the business (capital + capital
stock + earned surplus + retained earnings) less any intangible assets (e.g.,
goodwill) the firm owns.

The higher this ratio, the more leverage a business is using and the lower the
degree of protection afforded creditors if the business should fail. A higher
debt-to-net-worth ratio also means that the firm has less capacity to borrow;
lenders and creditors see the firm as being “borrowed up.” Conversely, a low
ratio typically is associated with a higher level of financial security, giving
the business greater borrowing potential.

5) Times-Interest Earned Ratio:

Eden’s Garden’s earnings are 2.37 times greater than its interest expense. EBIT
is the firm’s profit before deducting interest expense and taxes; the
denominator measures the amount the business paid in interest over the
accounting period.

A high ratio suggests that a company has little difficulty meeting the interest
payments on its loans; creditors see this as a sign of safety for future loans.
Conversely, a low ratio is an indication that the company is overextended in its
debts; earnings will not be able to cover its debt service if this ratio is less than
one. Many banks look for a times-interest-earned ratio of at least 2:1, but some
creditors may want to see 4:1 to 6:1 before pronouncing a small company a
good credit risk.

6) Average-Inventory-Turnover Ratio:

Eden’s Garden turns its inventory about 4.81 times a year, or once every 75
days.

Average inventory is the sum of the value of the firm’s inventory at the
beginning of the accounting period and its value at the end of the accounting
period, divided by 2. This ratio tells an entrepreneur how fast merchandise
is
moving through the business and helps him or her to balance the company’s
inventory on the fine line between oversupply and undersupply. To determine
the average number of days units remain in inventory, the owner can divide
the average-inventory-turnover ratio into the number of days in the accounting
period (e.g., 365 days ÷ average-inventory-turnover ratio). The result is called
days’ inventory.

An excessively high ratio could mean that a company does not have enough
inventory on hand and may be losing sales because of stock-outs. Similarly, a
low ratio could be the result of planned inventory stockpiling to meet seasonal
peak demand.

7) Average-Collection-Period Ratio:

Eden’s Garden turns over its receivables 9.93 times per year. This ratio
measures the number of times the firm’s accounts receivable turn over during
the accounting period. The higher the firm’s receivables turnover ratio, the
shorter the time lag is between the sale and the cash collection.

Eden’s Garden’s accounts receivable are outstanding for an average of 37 days.

The higher a firm’s average collection period ratio, the greater it’s chance of
incurring bad debt losses. Sales don’t count unless a company collects the
revenue from them. One rule of thumb suggests that a company’s collection
period ratio should be no more than one-third greater than its credit terms.

8) Average-Period-Payable Ratio:

Eden’s Garden takes an average of 49 days to pay its accounts with vendors and
suppliers.

Comparing a company’s average-collection-period ratio (DSO) to its average-

payable period ratio (DPO) gives owners meaningful insight into their
companies’ cash position. Ideally, the average payable period matches (or
exceeds) the time it takes to convert inventory into sales and ultimately into
cash. In this case, the company’s vendors are financing its inventory and its
credit sales. Online retailer Amazon benefits from this situation. On average,
the company does not pay its vendors until 127 days after it collects payments
from its customers. Subtracting DSO from DPO yields a company’s float, the
net number of days of cash that flow into or out of a company. Eden’s Garden’s
float is:

𝐹𝑙𝑜𝑎𝑡 = 𝐷𝑃𝑂 − 𝐷𝑆𝑂 = 49 − 37 = 12

A positive value for float means that cash will accumulate in a company over
time, but a negative number means that the company’s cash balance will
diminish over time.

9) Net-Sales-to-Total-Assets Ratio:

Eden’s Garden is generating $2.25 in sales for every dollar of assets.

The denominator of this ratio, net total assets, is the sum of all of a company’s
assets (cash, inventory, land, buildings, equipment, tools, and everything it
owns) less depreciation. This ratio is meaningful only when compared to that of
similar firms in the same industry category. Monitoring it over time is very
helpful for maintaining a sufficient asset base as a small business grows. A
total-assets-turnover ratio below the industry average indicates that a small
company is not generating an adequate sales volume for its asset size.

10) Net-Profit-on-Sales Ratio:

For every dollar in sales Eden’s Garden generates, Sam keeps 4.38 cents in
profit.

A recent study by Sage works shows that the average net profit margin for
privately held companies normally falls between 3 and 7 percent, but this ratio
varies from one industry to another. The retail industry typically produces a net-
profit-on-sales ratio that falls between 2 and 4 percent, but profit margins in the
healthcare field range between 10 and 16 percent. If a company’s profit margin
on sales is below the industry average, it may be a sign that its prices are too
low, that its costs are excessively high, or both.
11) Net-Profit-to-Assets Ratio:

Eden’s Garden earns a return of 10.74 percent on its asset base. This ratio
provides clues about the asset intensity of an industry.

Return-on-assets ratios that are below 5 percent are indicative of asset-intense

industries that require heavy investments in assets to stay in business (e.g.,
manufacturing and railroads). Return-on-assets ratios that exceed 20 percent
tend to occur in asset-light industries such as business or personal services—for
example, advertising agencies and computer services. A net-profit-to-assets
ratio that is below the industry average suggests that a company is not using its
assets efficiently to produce a profit. Another common application of this ratio
is to compare it to the company’s cost of borrowed capital. Ideally, a
company’s return-on assets ratio should exceed the cost of borrowing money to
purchase those assets. Companies that experience significant swings in the
value of their assets over the course of a year often use an average value of the
asset base over the accounting period to get a more realistic estimate of this
ratio.

12) Net-Profit-to-Equity Ratio:

Eden’s Garden is earning 41.14 percent on the money he has invested in this
business.

This ratio compares profits earned during the accounting period with the
amount the owner has invested in the business at the time. If this interest rate
on the owners’ investment is excessively low, some of this capital might be
better employed elsewhere. A business should produce a rate of return that
exceeds its cost of capital.
Eden’s Garden has $1.48 in current assets for every $1 it has in current liabilities.
The current ratio of 2:1 for small business is considered a safety cushion for
financial stability. The current ratio of Eden’s Garden suggests that the financial
position of Eden’s Garden is somewhat strong. A quick ratio of less than 1:1, as is
the case with Eden’s Garden, indicates that the small firm is dependent on
inventory and on future sales to satisfy short-term debt. The quick ratio of Eden’s
Garden suggests lower degree of financial security of the shop. A high debt ratio of
0.74:1 means that creditors provide a large percentage of a company’s total
financing and, therefore, bear most of its financial risk. It also suggests that the
owners are generating profits with a smaller personal investment. The debt-to-net
worth ratio of 2.82:1 suggests that the company has the less capacity to borrow and
the business can be considered undercapitalized. The time-interest-earned ratio of
2.37:1 suggests that the company has little difficulty meeting the interest payments
on its loans, which creditors see as a sign of safety for future loans. Eden’s Garden
has average-inventory-turnover ratio of 4.81 times per year which is above-average
suggests that the business has a healthy, stable and liquid inventory and a supply of
quality merchandise that is supported by sound pricing policies. The company has
average-collection- period ratio of 37 days which suggests good collection
procedures of the company. Also the company seems to suggest the greater chance
of incurring bad debt loss. The float of 12 days means that the cash will
accumulate in company over time. The Net-Sales-to-Total-Assets Ratio of $2.25
suggests that the company is generating an adequate sales volume for its assets
size. Also, the 4.38% of Net-Profit-on-Sales Ratio indicates the cost of the
products are neither too low, neither too high. Also, it falls under the average net
profit margin for privately held companies, which is a good sign for the company.
The return-on-assets ratio of 10.74% suggests that the company is using its assets
efficiently to produce the profit. Also, the return-on-net-worth ratio of 41.14%
indicates the owner is earning good amount of money he has invested in.

The ratios indicate the company’s average overall performance is remunerative.